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Type | Master's Thesis |
Scope | Discipline-based scholarship |
Title | Skewness Preferences |
Organization Unit | |
Authors |
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Supervisors |
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Language |
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Institution | University of Zurich |
Faculty | Faculty of Business, Economics and Informatics |
Number of Pages | 51 |
Date | 2019 |
Zusammenfassung | Years of research on decision making have demonstrated that in set-ups where risky decisions must be made, many people display a preference for the riskier option offering a small probability of large gains. Thus, favoring a positively skewed distribution of payoffs. One explanation for these choices is that they result from a non-linear weighting of probabilities. Indeed, a large body of literature has given evidence that many individuals do not weight probabilities linearly, but overweight small probabilities and underweight large ones, commonly known as the inverse-S probability weighting function. Furthermore, literature of various branches illustrate the impact of the presentation of the choice task on the decision that there are framing effects. The purpose of this paper is to test through incentivized experiments whether participants indeed display preferences for positively skewed options, whether this preference is stronger when the questions are presented as charts rather than as histograms and third if the probability weighting function has an impact on these choices. It is found that participants display stronger skewness preferences when investment choices are presented as charts rather than as distributions. That the S-shaped probability weighting function found with a risk elicitation task does at least partially explain skewness preferences in an investment setting. Furthermore, it is found that the predictive power of individuals? probability weighting functions is stronger when the investment choices are framed as charts as opposed to distributions. However, a consistent causal link between the parameters of the underlying distributions could not be found. Recommendations to address this issue are made. |
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